Anheuser-Busch InBev Earnings Preview: U.S. And Brazil In Focus

Anheuser-Busch InBev (NYSE:BUD) is scheduled to report its Q4 and full-year financial results on February 26. The world’s largest brewer has focused on M&A activities to grow its business, especially by acquiring strong local businesses in emerging markets that have an already established loyal customer base.  Q4 results will be crucial in highlighting growth in the Mexico business, more than a year after the acquisition of Grupo Modelo in June 2013, and the impact of the Oriental Brewery takeover in April of last year on Asia-Pacific profits.  But besides new business, AB InBev’s fourth quarter results will give guidance on what’s to come for the U.S. and Brazil operating units, which together formed over half of the net revenues through the nine months ended September.

We have a $116 price estimate for Anheuser-Busch InBev, which is below the current market price. However, we are currently in the process of incorporating the recent annual results into our forecasts and revising our price estimate.

See Our Complete Analysis For Anheuser-Busch InBev

How The Two Biggest Markets Might Fare

The U.S. and Brazil are the two largest markets for AB InBev, and the brewer holds dominant positions in both these beer markets. The beer trends, however, in both these markets are contrasting. The U.S. is a developed market where beer consumption has continued to decline through Q3, as millennial customers are more health conscious and look to curb alcohol consumption. In addition, beer penetration is already relatively high at around 80 liters per person in the country, which although less than the 90+ liter per capita beer consumption in most European countries, beats the intake per capita figures of most emerging economies, which are expected to be the major contributors to global beer volume growth in the coming years. Brazil is one such emerging market, where disposable incomes were growing in the last few years, boosting beer consumption and helping AB InBev grow volume sales. However, Brazil’s economy has been slowing in recent times on high inflation and interest rates, fostering negative customer sentiment, which has dragged down beer sales in recent quarters for the brewer.

• Brazil:

Although the overall beer industry volumes grew 5.9% year-over-year through September last year in Brazil, this was mainly on the back of the FIFA World Cup held in the country. Beer volume sales declined by 1.2% in Q3, and according to Brazilian government data cited by Bernstein Research, beer production volumes rose only 0.4% in Q4. ^[1] AB InBev’s Q4 results might be tainted by lower volume sales in the country and negative currency translations, with the Brazilian real losing 9% against a strengthening U.S. dollar in 2014. Foreign currency conversion was a 1.4% headwind on net revenues last quarter.

However, the brewer could achieve growth in its soft drinks business in the country, which constituted 26% of the net Brazil volumes through the first three quarters. Production in the soft drinks market rose 6% in the country in Q4. Another point that favors AB InBev is its stronghold in the Brazilian beer market. Despite falling overall industry volumes, the brewer’s market share was up in each of the last three quarters, reaching a massive 69%. This means that while the net beer consumption fell in Brazil, there was not much contraction in AB InBev’s customer base. More of the same could bolster the brewer’s revenues in the country this quarter.

• United States:

Volumes in the U.S. fell 3.7% in Q3 and 1.8% through the first nine months for AB InBev, and the company continues to lose share in the country’s beer market, which is weighing down the overall results. Volumes could remain subdued in the near term, too, as the brewer remains focused mainly on its premium category and also due to stiff competition from other large brewers such as MillerCoors, a joint venture between SABMiller and Molson Coors. One of AB InBev’s strongest performing beer brands, Corona, which grew by 6.7% in the last quarter, is not a part of the group’s portfolio in the U.S. due to antitrust policies, so the company is also losing out on the high demand for Mexican imported beers in the country.

However, strengthening U.S. macroeconomic conditions and the launch of new products by AB InBev are expected to boost fourth quarter results. Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second, third, and fourth quarters, increasing by 4.6%, 5%, and 2.6%, respectively. ^[2] The unemployment rate is at a six-year low. More jobs and increasing incomes could prompt customers to switch to higher priced beers, and consequently boost sales of AB InBev’s premium brands such as Bud Light and Budweiser, among others, which together formed around 18% of the brewer’s net volumes in Q3. Higher proportionate sales for these brands could lift the average revenue per unit volume, fueling growth in net sales this quarter.

The brewer might also have made progress with sales of Montejo, a Mexican beer that started selling in September last year in California, Arizona, Texas, and New Mexico, where 70% of America’s Latino population resides. According to Anheuser, around 8-9% of the U.S. beer market is formed by the Mexican import segment, and the early sales numbers for Montejo seem promising. ^[3] Demand for Mexican beer is already high in the U.S., and with an increasing Hispanic population in the country, the Montejo and other Mexican Grupo Modelo brands that AB InBev looks to launch in the U.S. in the coming years could achieve meaningful volume sales.

Analysts expect a modest 1.2% growth in AB InBev’s revenues in Q4, after the brewer achieved an organic sales growth of 5.3% through September (excluding the impact of foreign currency translations and M&A activities). We will keep a close eye on the company’s performance in its top two markets in this quarter and the full-year, amid slowing overall beer consumption in Brazil and an expected increase in beer volumes in the U.S.

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1. AB InBev Earnings: What to Expect, wsj.com [↩]
2. U.S. GDP growth rate [↩]
3. AB InBev earnings transcript [↩]